NTPM hit by rising costs

KUALA LUMPUR: A market leader in tissue products, NTPM Holdings Bhd is concerned about the rising costs of its main raw materials, recycled paper and pulp, but has decided not to pass down the cost increases to consumers.

In an email interview with The Edge Financial Daily, NTPM’s managing director Lee See Jin explained: “NTPM has to be socially responsible not to pass on the cost increase to the consumers each time there is a hike in the material and operational costs. The consumer is already burdened by the increase in daily living costs such as petrol and electricity.”

Pulp and recycled paper constitute 30% of NTPM’s cost of sales, he said.

The prices of recycled paper and pulp have been increasing by an average of 45% and 33% respectively over the last two years and this had an impact on NTPM’s profitability in its previous financial year ended April (FY11).

For its first quarter (1Q) ended July 31, NTPM posted a 13.2% year-on-year rise in revenue to RM106.95 million from RM94.5 million a year ago.

But due to the increase in raw materials cost and production overheads, its net profit fell by 25.6% to RM9.23 million from RM12.41 million previously.

Asked if NTPM is compromising its shareholder value by not passing down the cost increases to consumers, Lee said: “It all depends on the situation, that is, market forces and the competitors’ market position. Increasing our selling price will improve our profitability in the short term.

Lee said NTPM will continue to find ways to mitigate the impact of higher costs by continuing to improve its business operations and looking for avenues to bring down energy costs.

“However, using this strategy may result in some cost conscious customers seeking cheaper alternatives. Hence, we may lose some market share in the future.”

He said there should not be any price increment in NTPM’s products for now.

On the strategies against rising raw material prices, Lee said NTPM will continue to find ways to mitigate the impact of higher costs by continuing to improve its business operations and looking for avenues to bring down energy costs.

Electricity accounts for about 8.5% of NTPM’s cost of sales.

For 1QFY12, NTPM derived 80% of its revenue from tissue products such as facial tissue (19%), toilet rolls (33%), kitchen towels (6%), serviettes (5%) and jumbo rolls (8%).

The balance 20% came from personal care products such as facial cotton (3%), sanitary napkins (7%), baby diapers (9%) and adult diapers (1%).

NTPM’s Premier and Royal Gold brands are the top two market leaders in the facial tissue segment with a market share of 38.3% and 9% respectively.

Its Cutie brand is also the market leader in the toilet tissue segment with 48.5% market share.

Its Diapex brand in the baby diaper segment and Intimate brand in the sanitary napkins segment have a market share of 4% and 6.1% respectively.

Lee said the information for its products’ market share was extracted from ACNielsen’s market report for 2010. But the current market share for these products should not differ much, he said.

According to Lee, NTPM’s major competitors are Kimberly-Clark, Uni-Charm, SCA and DSG (Thailand).

Sales of NTPM’s baby diaper products have been growing rapidly with a 78% increase in FY11.

Lee said NTPM targets to achieve a market share of 10% to 20% for baby diapers in the future, which translates into sales of RM100,000 to RM200,000 per annum.

“We expect the contribution from baby diapers to be 5% to 10% of our total revenue,” he said.

On the introduction of new products, Lee said the company is interested in wet wipes and its inclusion will provide a comprehensive answer to the range of personal care products NTPM currently owns.

To increase market share and stay ahead of competitors, NTPM will focus on growth by expanding its product portfolio and introducing new innovative products, he said.

“NTPM will continue to enhance its distribution network in the country, which is one of the group’s core competencies, and strengthen its foothold on its higher value-added products range,” he added.

He said NTPM will also beef up its presence in established markets such as Malaysia and Singapore, and seek opportunities in Southeast Asia and the Oceania region.

For 1QFY12, most of its revenue came from Malaysia (67%). Other revenue contributors include Singapore (15%), Australia (5%), Thailand (3%), South Africa (3%), USA (2.1%), New Zealand (1.5%) and Brunei (1%).

In July, NTPM, through a wholly owned subsidiary, NTPM Paper Mill (Bentong) Sdn Bhd, had proposed to acquire land and machinery from Union Paper Industries Sdn Bhd for RM20 million.

Lee said Union Paper has two paper-making machines with a capacity of 30 tonnes per day. The machines are meant to produce “high runner” toilet rolls and facial tissue products.

The acquisition is expected to be completed by April 2012 and NTPM Paper Mill is expected to contribute to NTPM’s earnings from FY13 onwards, said Lee.

Currently, NTPM has 18 paper-making machines with a total capacity of 255 tonnes per day. NTPM is currently operating at 80% capacity.

For its personal care products, NTPM has two production lines for baby diapers and six machines for sanitary napkins. Both operations are currently operating at 50% capacity.

On the industry’s outlook, Lee foresees the market growth for NTPM’s products over the next year or two possibly moderating due to inflationary pressures on consumer spending power and waning consumer confidence.

“At the same time, we are feeling the pinch of intense competition from other market players.

“However, we are optimistic that we shall continue to do well and thrive in the years ahead mainly due to Asia’s robust growth led by its strong domestic demand,” he said.

Since its listing in 2003 until FY11, NTPM has chalked up compound annual growth rates for revenue and net profit of about 11% and 8% respectively.

For FY11, it registered revenue of RM420.23 million, an increase of 9.7% from RM383.12 million for FY10.

Despite the higher revenue, its net profit declined 12.2% to RM52.06 million from RM59.32 million previously, due to the increase in raw material prices.

NTPM has a market capitalisation of RM555.98 million at its closing price of 49.5 sen last Friday. Its stock has fallen 11.61% year-to-date and has traded between a 52-week high of 58 sen and a low of 46 sen.

As at July 31, NTPM had cash reserves of RM20.75 million and total borrowings of RM75.8 million.

For FY11, it paid a total net dividend per share of 2.9 sen which represented a payout ratio of 62.56%. Its dividend yield was 5.86% based on its last traded price.

In a Sept 26 report, OSK Research downgraded NTPM to a “sell” with a fair value of 46 sen from 53 sen previously.

OSK Research said NTPM posted poorer than expected results in 1QFY12 as margins were impacted from gas and electricity price hikes, higher raw material prices, and higher indirect raw material such as chemical and packaging prices.

However, it stated that if the global economic conditions worsen, the potential decline in pulp prices would augur well for NTPM.